Prices are rising for these homes in the Christianshavn district of central Copenhagen. Photo: Bloomberg

A rebound in Denmark's housing market shows the recovery the government has been waiting for is now underway, Economy Minister Margrethe Vestager said.

Flat prices rose 2.5 per cent in May from April, and 12.4 per cent from a year earlier, Statistics Denmark said on July 31. House prices rose 0.5 per cent in May from the month earlier and 3.9 per cent from a year earlier.

"There was evidence of a recovery in the housing market in 2012 and prices have risen slightly in 2013," Vestager said in an e-mailed reply to questions. "Even though activity in the housing market continues to be low, the gains, along with other indicators, support our cautious optimism on the Danish economy."

The government, which is due to publish its preliminary budget proposal later this month, in May cut its economic forecast for the year to 0.5 per cent growth from the 0.7 per cent seen in April. It kept its 1.6 per cent growth estimate for 2014.

"I'm seeing the economy in the same way as when we set out our course earlier this year," Vestager said. "Denmark is heading in the direction we forecast."

Denmark's US$355 billion economy has struggled to surface from a burst housing bubble that drove property prices down 20 per cent from a 2007 peak and wiped out more than a dozen community banks. Gross domestic product contracted 0.5 per cent last year and stagnated in the first quarter, the statistics office estimated.

The government-backed Economic Council has urged the Social Democrat-led coalition of Prime Minister Helle Thorning-Schmidt to add stimulus to revive consumer demand and help create jobs.

Vestager said this month's budget proposal would not include extra stimulus measures.

According to some economists, recent housing data now suggest signs of overheating. The 12.4 per cent annual gain in flat prices "can't be justified on the back of the economic development," Steen Bocian, chief economist at Danske Bank, said on July 31. "At this point, we're not looking at a bubble, but if the development continues, there's a considerable risk."

Danes have taken advantage of record-low interest rates driven down by AAA-rated Denmark's status as a haven from Europe's debt crisis. While private debt is 310 per cent of disposable incomes, according to the Organisation for Economic Cooperation and Development, government debt is less than half the euro-area average.

"None of us knows if house prices adjusted enough or if the property market will need to take another downturn," Bocian said.

This article appeared in the South China Morning Post print edition as Optimistic signs as market rebounds